By Michael J. Majewski 

As a manufacturer, the product your business makes is often its biggest asset and the largest expense of working capital. But if you aren’t properly using an inventory management system, overstocked inventory can stand in the way of your financial goals. Fortunately, there are several proven inventory management best practices for manufacturers that will help streamline your business for future success.

1. Control Your Amount of Inventory 
Your priority when managing your inventory should be to keep it to a minimum. Holding lower quantities of inventory will reduce shrinkage, lower holding costs, increase space usage, reduce obsolete products, and increase the ease of locating items. Reassessing the amount of inventory kept on hand, educating employees on the best practices of handling inventory, and instituting a cycle-count system for accuracy will keep your inventory at an effective level.

When reviewing the amount of stock you keep on hand, consider which items sold more consistently and when items are expected to be sold more frequently, such as seasonal inventory. Review inventory historical data yearly to evaluate your safety stock. Ideally, inventory levels  should increase when demand is expected to rise.

Employees should be able to easily locate and store products during periodic cycle counts. Inventory that is easy to find will reduce labor hours and improves efficiency when fulfilling customer orders.

2. Improve Your Vendor Relationships
Maintaining good relationships with your vendors can lead to the expedited delivery of products and a preferred customer status.  Effective communication with vendors, along with timely payment of invoices, will help create these good relationships. Improved vendor relationships will pay off when demand for an item unexpectedly increases and quantities are quickly needed.

3. Know Your Physical Inventory
Companies should always know the amount of inventory they have on hand. Controlling inventory is often the single greatest challenge of your business; therefore, instituting an effective inventory management system is vital to its long-term success. One of the most effective ways to maintain an accurate inventory count is to institute a cycle count program. For example, products could be rated A, B, or C with A products counted monthly, B products counted quarterly, and C products counted annually. This will ensure all items are counted at least once per year and items that move quickly are counted more often.

If a cycle count program has not be instituted, management should conduct a full physical inventory count at the end of the year.

Preparing for an annual physical inventory count should begin months in advance. Begin by preparing physical inventory procedures and properly train the employees conducting the inventory. All items should be labeled and located in your inventory system.

On inventory day, form “count teams” that consist of two employees: one to count and the other to write down the amounts. During the inventory, counts that are in agreement with the inventory system should be checked off by the supervisor as completed and second counts should occur when any discrepancies arise. If any additional discrepancies follow, a supervisor should perform the final count. If the counts are still in disagreement, then an adjustment to the system should be made. Once the count is complete, management should meet with employees and determine what worked well, what didn’t, and what can be improved upon for future counts.

Most importantly, reward your workers for being diligent on the day of inventory. There is nothing exciting about doing an annual physical inventory count.

Inventory Management is Crucial for Manufacturers
Inventory management is a critical business process for manufacturers, but it doesn’t have to consume all your time or resources. By keeping your inventory to a minimum, forming strong vendor relations, performing a physical inventory, and preparing an inventory counting system will help improve your efficiency and profitability company-wide. Contact your advisor for further best practices to help you gain complete control over your inventory and reap the maximum benefits.